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Chapter 11 Archives

For sports retailers, spring is a great time to be in business. Many high school and outside organizations are gearing up for baseball season. Also, as the weather improves in colder regions of the country, many parents are buying new bicycles, helmets and pads for kids learning to ride bikes. Even golfers are coming out from their winter hiatus; which means that new gear and clubs will likely be purchased.

Music festivals are a generally good money making opportunities for promoters and producers. This is ostensibly why a number of festivals continue to grow in popularity. When you think of South by Southwest in Austin, Texas, Electric Zoo in New York City and Mysteryland, the music and hype that bring people to these venues suggests that they will continue to be profitable for years to come.

In a prior post, we highlighted how retailers were less likely to emerge from Chapter 11 bankruptcy compared to the past because of changing market forces and the proliferation of companies that are willing to facilitate "going out of business" sales to protect unsold assets.

According to the old adage, you can go home again...unless you are former American Apparel CEO Dov Charney. The ousted CEO recently teamed up with a group of new investors to mount an attempt to take back the company he started nearly 20 years ago. He recently filed a motion objecting to American Apparel's current reorganization plan and proposing his own, which would provide more than $300 million in financing and ostensibly leave the company in better financial condition after it emerges from bankruptcy.

As we noted in our prior post, last week's decision by the Federal Reserve to increase interest rates may not initially affect Chapter 11 bankruptcy filings. However, as future increases are implemented, it is possible that future "363 sales" may be affected. After all, when credit becomes more expensive, it makes potential buyers contemplate further how the acquisition will be financially feasible in the short term as well as in the long term.

Wednesday was a seminal moment in the finance industry. The Federal Reserve announced that it would raise its benchmark interest rates by .25 percent. The rate has hovered around zero for the past seven years since the great financial crash of 2008. It is also expected that further interest rates increases will be coming, which will likely push the rate to 1.37 percent by the end of next year.

In a prior post, we highlighted a few trends that could spell the end of Chapter 11 bankruptcies for large businesses. Essentially, these enterprises have levered their assets in a way that makes the business difficult to reorganize because so many other unrelated parties may be required to agree to a plan that makes it unfeasible to execute.

When Congress approved the current Chapter 11 bankruptcy law in the late 1970s, it was imagined that this part of the code would allow distressed businesses to leverage economic and legal interests in their companies so that they may attract buyers that would infuse money into the organization (as well as new ideas) so that the company could emerge stronger and more profitable.

While the American economy has questions as to whether improvement is coming, one thing is certain. Retailers that seek bankruptcy protection are more likely to fail than to businesses in other industries. The stories of failed businesses that go through bankruptcy are famous, troubling and unfortunately, predictable.

As much as the tech industry drives innovation, and therefore, successful products and companies, there is a downside to the industry. Essentially not every company that successfully raises money can survive competition and an ever-changing marketplace. Because of this, bankruptcy may be a likely scenario for a company that can’t stay ahead of changing dynamics.

Shulman Hodges & Bastian LLP represents clients in Orange County and throughout California, including Irvine, Riverside, Los Angeles, Anaheim, San Bernardino, Ontario, San Diego, Santa Barbara, San Francisco, Riverside County, San Bernardino County, Los Angeles County, San Diego County, Southern California and the Inland Empire.